CRA

SH Presented By:
Hitesh Dutt - 20
Kuntal Datta - 25
Poorva Bhardwaj
- 32
Sameer Kalra -
 The Company History
2
 Lehman Brothers had humble origins, tracing its roots back to a small
general store that was founded by German immigrant Henry Lehman in
Montgomery, Alabama, in 1844. In 1850, Henry Lehman and his brothers,
Emanuel and Mayer, founded Lehman Brothers.
Years Events
 1844 Dry-goods store
1850 Lehman brothers
Early 1850’s Started to accept payment in cotton for goods and
also created a secondary market for trading in
cotton
1858 Trading in coffee Exchange and also the New
York Stock Exchange
1899 Underwrote a public offering for the International
Steam Pump Company
1906 Started underwriting some bigger public
offerings.
1930s focus of Lehman went toward venture capital

1975 Firm merged with Kuhn, Loeb and Company to

form at the time the 4th largest investment bank

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 Operating Principles
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 Demonstrating a Commitment to Excellence

 Ensuring That Their Organization Is a True
Meritocracy

 Demonstrating Smart Risk Management

 Preserving and Strengthening the Culture

 Always Acting With an Ownership Mentality

 Building and Protecting Their Brand

 Maximizing Shareholder Value
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 Product & Services
4
 Financial Services
 Investment Banking
 Equity
 Trading
 Research

 Investment Management
 Private banking
 Private equity


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 Subprime????.....
5

Prime Lending Subprime Lending

Issued to borrowers with highly rated credit Issued to borrowers with low incomes and
histories. assets, and with troubled credit histories.

Low interest rate High Interest rate

Called A-paper credit Called B-paper credits

üTyp ica lly , it is th e p o o r a n d th e yo u n g w h o fo rm

th e b u lk o f su b -p rim e b o rro w e rs

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 Why loans were given
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 Real Estate Boom would allow even people
with dodgy credit backgrounds to repay
on the loans they were taking to buy or
build homes. As in 1997 prices of home
were almost double.


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 Contd. . .
7

 Government encouraged to lend to sub-

prime borrowers, arguing that this would
help even the poor and young to buy
houses.
 Govt. want to increase the spending of people
by increasing the availability of money


 With stock markets booming and liquidity,

many big fund investors saw sub-prime
loan portfolios as attractive investment
opportunities. Hence, they bought such
portfolios from the original lenders.
 This in turn meant the lenders had fresh funds
to lend. The subprime loan market thus
became a fast growing segment.
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
 Effect of interest rate
on subprime:
8

 Rate of lending to Sub prime was 2% higher than

the prime lenders


 Added to high risk of defaulting.



 Higher interest rate meant substantially higher

EMIs than for prime borrowers for same
duration, further raising the risk of default.


 Further, lenders devised new instruments to reach

out to more sub-prime borrowers. Being flush
with funds they were willing to compromise on
prudential norms. The repayment of the
principal portion was to start after two years.

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
 How did this turn into crisis:
9
 The housing boom in the US started
petering out in 2007.


 The boom had led to a massive increase

in the supply of housing. Thus house
prices started falling.



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 Contd. . .
10

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 Contd. . .
11

 Default rate of sub prime borrowers

increased as the housing value
decreased, as well as banks were
exposed to higher risk.


 Adjustable Rate Mortgages:- Mortgages

where interest rate is adjusted
periodically


 Slowdown in the US economy made

matters worse. 02/15/10

 Roadmap to subprime:
12

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 Impact of Subprime crisis
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 $512 billion in sub-prime losses were write

off by Global Banks


 High losses were borne by major banks like

Citi, Merrill Lynch, JP Morgan chase, Freddie
Mac a& Fannie Mae


 Till July09 end #64 US banks collapsed.



 FDIC said the number of "problem banks" in

the US have risen to a 15-year-high of 305
in the first quarter of 2009 02/15/10
against 252 in
 Subprime on Lehman
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 Lehman adopted a very aggressive leverage policy in the
context of a major financial crisis.


 The roots of this crisis have to be found in bad regulation,

lack of transparency, and market complacency brought
about by several years of positive returns.


 Lehman’s bankruptcy lead to a reassessment of the risk, in

particular in the market for credit default swaps.


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 Reason for failure
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ØH ig h R isk -
D e riva tive s C o m p lex Pro d u cts H ig h R e tu rn
ØA g g re ssive
S tra te g y
ØW ro n g
Fo re ca stin g
M o rtg a g e s

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 Reason for failure
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 End product purchased by Lehman

brothers were embedded by these
types of risk :-
 Credit Risk
 Asset Price Risk
 Liquidity Risk


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 Reason for failure
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q C re d it R isk a n d R e tu rn
Low

Return position
Loss position

Risk position
AAA

Portfolio

High

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 Reason for failure
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q U S cre d it u p g ra d e s a n d
d o w n g ra d e s
US credit upgrades &
downgrades

2007,Q1 2007,Q2 2007,Q3 2007,Q4 2008,Q1

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 Reason for failure
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q M a rke t C ra sh

Dow Jones Industrial

Average

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 Reason for failure
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 Lehman Brothers had massive exposure to

property derivatives.


 Lehman had a ton of what is called

"leveraged assets".
 (D/E ratio of 30:1 where as industrial is
15:1)


 Lehmann was exposed to a lot of Subprime

Mortgage Backed Securities.


 Lehman's Colossal Miscalculation.

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 Why AIG not Lehman ???
21

 Bailout was provided depending on financial markets.

 AIG insured millions not just of individuals but of
institutions as well.


 It is also the insurer of million dollars worth of securities

issued by institutional lenders and borrowers. The
collapse of AIG would have surely brought down these
companies too.


 Federal Reserve had conducted assessments which

showed, collapse of Lehman won’t bring much chaos
to the markets as opposed to the collapse of AIG or
Bear Stearns or Fannie Mae or Freddie Mac.
 02/15/10
 Contd. . .
22 

 Lehman’s financial troubles have been plaguing the

company for more than a year prior to bankruptcy filing.
 The Fed decided not to help these investors, probably
because it thought Lehman’s investors could have
saved themselves by managing investment risks in a
company already suffering from poor financial health.


 The Fed may have wiped out what credibility it won resisting
Lehman's rescue pleas and may have opened the door to
countless other companies to come calling for help

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 Filing bankruptcy
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 On September 15, 2008, the firm filed for Chapter 11
bankruptcy protection.

 The filing marked the largest bankruptcy in U.S. history.

 British bank Barclays announced its agreement to purchase,
subject to regulatory approval, Lehman's North American
investment-banking and trading divisions along with its
New York headquarters building.

 On September 22, 2008, Nomura Holdings announced that it
had agreed to acquire Lehman Brothers' franchise in the
Asia Pacific region, including Japan, Hong Kong and
Australia.

 Lehman Brothers' Investment Management
02/15/10 business,
including Neuberger Berman, was sold to its management
 Impact of Lehman failure
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 Exposure to debt in (selective) default.
 LBHI had outstanding long-term debt of approximately $110
billion as of Aug. 30, 2008. Short-term commercial paper
outstanding was around $8 billion at the end of May.
 Money market funds managed by banks were holding some
Lehman debt, leading to potential compensation to clients.


 Counterparty exposure:
 More significant is counterparty exposure to the various
companies within the Lehman Bros. group.
 These exposures were largely confined to the biggest banks
and broker-dealers, but smaller institutions had some as
well.
 Given the probable movements in the value of the collateral,
potential future exposure rose materially and were
subjected to considerable volatility. 02/15/10
  
 Contd. . .
25

 Market price impact.

 Even entities active in the capital markets
that have negligible direct exposure to
Lehman suffered, to a potentially greater
extent.

 This resulted in further downward pressure on
a wide range of assets.

 That in turn, forced highly leveraged
institutions to liquidate to meet margin calls,
putting further pressure on assets.
   02/15/10

 Lessons Learnt
26

 When a company attacks short-sellers, run.

 Good management teams embrace criticism, address
it and move on. Lehman attacked the messenger.

 Lots of banks have downplayed their write downs by
stressing net figures that include gains on so-called
economic hedges, or as Lehman called them,
"economic risk-mitigation strategies.”
 


 Gains on declining debt values mean something.

 When the fair value of a company's debt slips, the
market is telling you the company's assets must
be deteriorating, too. If you had guessed from
the ratio at Lehman that its asset values had
further to fall, you wound up with the right
answer. 02/15/10
 Conclusion
27

 Some companies are indeed not too big to

fail
  
 While the availability of liquidity can provide
some form of short-term life support to an
institution under severe stress, it is either
real or perceived capital inadequacy that
can precipitate a company's failure
  
 The impact from a regulatory action or
inaction can have unintended
consequences through indirect exposures
and linkages that sometimes are only
known to direct market participants.
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
 Questions
28

THANK YOU !
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